Pearlstein: Big Bank Regulation

Steven Pearlstein
Washington Post Columnist
Wednesday, May 27, 2009; 11:00 AM

Washington Post business columnist Steven Pearlstein was online Wednesday, May 27 at 11 a.m. ET to discuss his column on the failure of the Comptroller of the Currency to regulate big banks.

Read today's column: The Big Banks' Best Friend in Washington.

Pearlstein won a Pulitzer Prize in 2008 and is co-moderater of the On Leadership discussion site.


DC: Given the Fed has responsibility over bank holding companies, rather than the OCC, what role do you believe the NY fed played in the recent financial crisis?

Steven Pearlstein: They played a role, and this was surely not the Fed's finest hour, either, driven by Dr. Greenspan's aggressive deregulatory philosophy as well as the incentuous relationship between the big banks and the NY Fed. As you may recall, I think the Fed should be totally stripped of its day to day supervisory role as far as all banks are concerned, even systemically important ones, with all safety and soundness regulation put in a new independent agency.

The Fed's culpability was that it saw how so much risk was being transferred from the banks to the shadow banking system and off balance sheet entities, by way of the investment banks, and it did nothing to stop it or the regulatory arbitrage that lay behind it. It has never acknowledged that failure, never apologized for it and continues to rationalize its behavior with all the "perfect storm" nonsense. Now the NY Fed is knee deep in cleaning up the mess it helped to create, and doing a pretty fine job of it, I will say. That includes the stress tests, in which it had a major role and in which it insisted on making sure the standards were tough, unlike the OCC. But that doesn't change my mind about supervision: the Fed is just too cozy with the big banks, and too allergic to transparency, to be a good safety and soundness regulator going forward.


Raleigh, N.C.: Good morning. A few technical questions. Is the comptroller a presidential appointment? Does the Senate approve? How long is the term? What has been Obama's authority over the position?

Steven Pearlstein: Five year term. Appointed by the president, confirmed by the senate. Technically, can't be removed but for cause, IN reality, if a Treasury secretary or a president asked a comptroller to resign, he or she probably would. Dugan has been protected by Geithner, who apparently considers himi a team player in the cleanup effort. Traditionally, these are non-partisan jobs where the terms don't coincide with presidential terms. But as I asked Dugan yesterday, how bad of a banking crisis do you have to have before the top bank regulator is called to account. He didn't really have an answer to that one.


Washington: Steven,

A perfect write-up on the situation concerning the comptroller; thank you. I need to add: What took so long?

Another point: When state regulators started taking a closer look at the practices of local and community banks, the big banks stepped in and purchased those banks, thus removing state oversight and handing it over to the OCC. In the years leading up to the crisis, the comptroller of the currency was instrumental in arguing federal pre-eminence, when several states attempted to clamp down further on bad lending practices, since those local banks had become subsidiaries of the big banks.

Steven Pearlstein: You are right: Dugan has been an attack dog in asserting federal preemption rights on bank regulation, including pursuing a case now before the Supreme Court. And yet while asserting that the world should rely on the feds to regulate this national (even global) industry, he then turns around and doesn't regulate. That perfectly reflects the attitude of the big banks: give us one national regulator, and then make sure he doesn't do much.

By the way, I agree that banking and finance is an interstate industry and should be regulated centrally by the federal government. State banking regulation is generally not a good idea. But that does put the onus on the feds to do a good job, which they haven't.


Bend, Oregon: I would very much like you to write a column regarding the role of Standard and Poor's and others in approving phony instrument ratings. This, I believe, is a major cause of this recession that is not being addressed.


Steven Pearlstein: It has been widely reported and addressed, although not by me with any depth. Not sure why. Probably because I couldn't think of anything particularly new or original to add to the conversation, other than to suggest that their fees should be paid by the buyers of the instruments that rate, not the sellers.


B'burg, Va: On the Federal Reserve website is a link to an address by Vice Chairman Kohn. It has the following sentence: "Accordingly, we are now earning an abnormally high net rate of return by funding our acquisition of long-term assets with almost zero-cost excess reserves--and this relative yield relationship is likely to last for some time."

The term that is confusing to me is the description (zero cost) that is applied to excess reserves. Does he mean that their excess reserves are courtesy of the taxpayers? If the banks had to compete for deposits (with higher interest rates on savings accounts) would that increase their cost of excess reserves?

In other words, are individual bank customers getting the short end of the stick because they are not able to realize a reasonable interest rate on loaning the bank money (as compared to the rates banks charge customers for loaning money)?

Steven Pearlstein: Short answer to your question: Yes. Banks aren't competing on price to attract deposits because they can also borrow for almost nothing from the Fed and the Federal Home Loan Bank Boards. Banks like deposits, they compete for them in other ways, like putting lots of branches on corners, but they don't like to get into bidding wars over them when they have an alternative. And Kohn is rightL the bank spreads now are as good as they've ever been, which is why the Fed will want to keep interst rates as low as possible for as long as possible, to allow the banks to earn their way out of the hole they've dug for themselves with their past and future loan losses. At some point, however, they will be torn between using low-interest monetary policy to bail out the banks and their obligation to fight inflation by sopping up all that liquidity they have unleashed into the global economy. That should be interesting.


Boonsboro, Md.: A bit off the topic, but have you or anyone at the Post investigated this? Chrysler dealers shut down in Obama bankruptcy are mostly Republican? It seems a crosscheck of dealerships to be closed versus donations shows almost all the dealers to be closed donated to Republicans.

Steven Pearlstein: Oh, please. What percent of all auto dealers are Republican? I bet its pretty high.


Los Gatos, Calif.: Why is Reich gone and Dugan still around?

Steven Pearlstein: Reich was obviously much, much, much worse. But that doesn't exactly answer your question, does it.


Washington, D.C.: Steven, thanks so very much for your wonderful piece today -

Ever seen a "financial institutions examination" in progress? I am a banking lawyer, and I advise people about these events for a living.

There is an entity called the "Federal Financial Institutions Examinations Council," in which the FRB, FDIC, OCC, OTS, FHLBB, and NCUA agree what questions each can ask of a bank which is regulated by more than one. So if the FDIC guy sees a consumer-practice violation, the FDIC guy who deals with solvency CANNOT (official orders!) tell the OCC guy who deals with chartering, community-reinvestment and institutional conduct. True fact!

The bank examiners are:

- NOT lawyers; - NOT accountants; - NOT valuation assessors.

It is a riotously funny joke. If, of course, institutional insolvency were amusing.

Steven Pearlstein: Interesting. Wonder if the congressional banking committees know about that. Would be a good question for someone to ask these guys the next time they show up for a hearing. Let them squirm a bit as they explain how they've allowed the industry to dictate how they regulate.


DC: It is very funny to hear hedge funds and large banks complain that they are being treated unfairly. They really take stand on deeply-held principles provided it is clearly in their self interest to do so. What is it about finance that attracts sociopaths?

Steven Pearlstein: Yes, they love to appeal to our sense of justice when it suits their interest, but when we raise other questions like how come they make so much more money than everyone else or why should they not pay the same taxes as their secretaries, they treat us like we're naive bumpkins who don't understand how markets work. Blind spot, I'd say.


Washington, D.C.: Don't you think how the agencies are funded plays a role in your column? Shouldn't all the five federal banking agencies be uniformly funded?

Steven Pearlstein: I think most are funded by fees on the banks, which seems appropriate to me. Since the fees are automatic, based on formulas having to do with assets or deposits or some such, I don't think there is a problem of conflict of interest. There is no discretion on the part of the bank managers.


Rochester, Minn.: Dear Steven,

Have been missing your chats recently. I have heard that Canada has done a nice job avoiding bank problems that, for example, the US has had. In your opinion, which country has had the best record avoiding these problems and why? Regulatory structure?

Steven Pearlstein: The Canadians have a more logical regulatory structure, as I understand it. They also have more respect for civil servants and government in general, and bank regulators in particular -- the Canadian public, for some reason I never understood, gets very agitated when banks make too much profit. Kind of a populist thing from the prairie. But what's also at work is that their banks are simply more conservatively run and haven't got caught up in the kind of silly and dangerous competition that the big American banks have.


DC: Great job. Throw the deregulatory bums out.

Steven Pearlstein: Thanks.


Washington, DC (NoVA): I am confused by your article's reference to IndyMac and BankUnited as symtomatic of Dugan's defense of BIG BANKS that cause the problems at FDIC, but both of these were apparently thrifts under the OTS not OCC.

So I then looked at the video of the FDIC board meeting, and Dugan's presentation (from about 9:52 - 18:-00 minutes in the video) seems to focus more on the legal basis for the FDIC actions and the requirements for appropriate rulemaking, suggesting that the shift in assessment base and in possibly authorizing additional assessments needed a better basis than the FDIC had. Maybe you can post a link to the video and guide more people to actually hearing what was said. Thanks.

Steven Pearlstein: He had a number of reasons for his dissent, one of which was the rulemaking process. Its a rather technical area and I didn't get into it. Frankly, I find it rather disingenuous that the head of an agency known for its aggressive lack of transparency should suddenly be concerned that not enough notice was given to change the regulation on how bank insurance premiums are assessed. One thing we probably don't need to worry about is whether big banks have enough opportunity to convey their views to policy makers in Washington. They are very ably, aggressively represented, and as Dugan well knows, were lobbying heavily against the change in assessments for a week before the vote, no doubt pulling all the strings they could with the Treasury and the Congress. This issue is really just a diversion.

As for your comment that these were thrifts, it is true -- they were regulated by OTS, not OCC. That was not my point at that part of the column. Both thrifts and banks, however, have the same deposit insurer, the FDIC. And my point was that big institutions like Indy Mac and BankUnited are causing a goodly share of the FDIC's losses, not the small community banks that Dugan was blaming in his dissent.


Washington, D.C.: You also should point out how the OCC has pushed in the courts the doctrine that they preempt virtually all state and local regulation that may affect national banks, even beyond the OCC's core function of regulating bank soundness. (The OCC's preemption focus actually predates Mr. Dugan, but it has been pushed so aggressively that it might even give an executive power-monger like Dick Cheney pause.) The problem is, that where the OCC argues that their authority preempts state and local regulation, they have not used their authority, leaving a large void in the protection of consumers and the public interest.

Steven Pearlstein: Exactly.


Washington, D.C.: Steve, your last response on how the agencies were funded is completely inaccurate. The FRB and the FDIC are self-funded by either the insurance fund or the profits earned by the Federal Reserve. The OTS and the OCC are funded by assessments of assets under supervision. That is why there is a competition for national regulators (OTS and OCC) to try to get banks to convert to federal charters -- and why the OTS was so willing to take some of the biggest failures on. They needed the money to fund operations. The FDIC and FRB have no motivation to make supervisory decisions based on assessments, because they do not assess based on whether the entity has one form of charter or not -- but the OTS and OCC only get the funding from those that are under their supervision...

Steven Pearlstein: Thanks for that correction and clarification. And your comment is a good segway into the issue of restructuring bank regulation so there is not this unhealthy competition among regulators to show which can be more "accomodating" to the industry. There needs to be one single, strong, aggressive regulator and no opportunity for regulatory arbitrage.


Arlington, Va.: Why are too big to fail banks not being broken up, but instead encouraged to grow larger? Also, I am very curious as to the financial industries definition of the term 'risk'. Most I think see a one-sided definition. Big risk=big rewards.

Steven Pearlstein: The argument is made by others that if banks are too big to fail, they ought to be broken up. I don't quite agree with that. Not sure you can put that genie back in the bottle. But I do agree that if banks are too big to be managed successfully and prudently, they should be broken up. That is my first question.


Washington, D.C.: got a letter from Bank of America yesterday saying they changed their mind and they wouldn't be raising late fee from $35 to $39. Now if i can only figure out why they charge me a late fee when i sent a payment? Can they pretend they didn't get it?

Steven Pearlstein: They can do anything they feel they can get away with, which is quite a lot. Your only recourse is to call an 800 number, hold the line for 30 minutes and then be put through an administrative nightmare until you give up. Your only recourse is to pull your money from their bank, which you should do if you are unhappy with them, and move to a small community bank like Cardinal or Burke & Herbert, where you can actually talk to someone and get problems resolved.


DC: Steve, speaking of regulatory consolidation, how do you propose it works? OCC has thousands of bank examiners, and only a hundred attorneys. SEC and CFTC have mostly lawyers, and virtually no examiners. The Fed examiners are not even government employees -- and the FDIC has an inherent conflict of interest between supervising banks and ensuring that any losses are born by TARP and not the insurance fund. So how do you suggest going about this process?

Steven Pearlstein: Actually, I don't seed why the agency that is in charge of insuring deposits and resolving bank failures shouldn't be the day to day safety and soundness reegulator. The incentives are nicely aligned. Obviously, the FDIC doesn't have that capability now, but that doesn't mean it cannot become the base from which the new regulator is built. The fact is that we need the conservatism of an agency like the FDIC.


DC: There's a proposal in Congress to appoint a commission to investigate what went wrong in national regulation and (lack of) oversight of banks and financial institutions. A smart and forceful (but controversial) chairman to lead that commission would be Eliot Spitzer.

Steven Pearlstein: Not a bad idea, other than for the fact that you don't want a chairman going after big, powerful interests who himself is politically wounded.


Boston, Mass.: In your article, you cite the failure of Indy Mac Bank as the most costly of last year. The Office of Thrift Supervision (OTS) was the risk regulator for that institution. There is some that think the OCC should take over the OTS, and then there would be just one regulator for federally chartered banks and thrifts. Does this make sense?

Also, the FDIC serves as the primary federal regulator of state chartered banks. Should they be a risk regulator, or should they focus more on providing deposit insurance and other liquidity programs, which they have expanded during this crisis?

Steven Pearlstein: Well, those are the issues that the Congress is going to have to wrestle with as it restructures the regulatory apparatus.


Washington, D.C.: What about systemic risk? Why not create a systemic risk council, like the FFIEC, rather than rely on the FRB to play this role?

Steven Pearlstein: You could do that. I think the systemic risk regulator also ought to be the agency that can respond to systemic risk when it arises, and that often involves the kinds of things that only the Fed can do and do quickly.


Dallas: Mr Pearlstein:

You responded to an online question: "But as I asked Dugan yesterday, how bad of a banking crisis do you have to have before the top bank regulator is called to account. He didn't really have an answer to that one."

When has Geithner been called to account, by you or anyone else in a meaningful way for directly supervising Citigroup, which is obviously the biggest banking basket in the nation?

Simply writing, as you did in response to a question, that it wasn't the Fed's finest hour, or that the NY Fed is now cleaning up a mess it helped to create, doesn't quite deliver the scrutiny where it belongs.

Steven Pearlstein: Fair enough. Geithner ought to be held more to account for the NY Fed's regulatory failures. I don't think this disqualifies him from being Secretary of the Treasury or continuing to oversee the financial rescue, which for all its faults has largely succeeded. It does disqualify him from being a safety and soundness bank regulator, but that's not his job now.


manhattan, ks: Hi Steve--your column today about John Dugan was as illuminating as it was frightening. I was wondering if in this chat you could tell us a little more about the man: His experience before and qualifications for his appointment? The procedure used to make him comptroller of the currency? and When his tenure expires? Many thanks for keeping us informed.

Steven Pearlstein: As often is the case, he was top staffer to Jake Garn, the former Republican senator and chairman of the Senate Banking Committee. That's often where regulators get their start. Or they are banking lawyers, like Dugan's precedessor, Jerry Hawke. Dugan is a conservative, deregulatory Republican staffer who got along well with the Democrats and the Democratic staff at Senate Banking. I wouldn't suggest he's not qualified for the job. He just didn't have the backbone to make the banks stop doing stupid things when that was needed.


Tampa, Fla.: The OCC historically has been concerned ONLY with the financial health and thus profitability of banks. The greater bank profits, the less risk of failure. At least that's how OCC thinks. I used to work at the Treasury Dep't on banking issues and the joke was that OCC would OK child slavery if it cut costs and thus boosted profits and capital.

The bureaucrats at OCC feel the same way as Dugan, albeit perhaps not as strongly. They obsess over call reports, which track each bank's capital. OCC has long had run-ins with other banking regulators, both federal and state.

A side effect of this view was that OCC opposed letting banks become S corporations. S corporations have to distribute dividends sufficient to pay the shareholders' personal income tax. OCC does not like dividends. OCC feared S banks would have too strong an incentive to reduce capital by paying dividends.

Steven Pearlstein: This is exactly right -- the belief that as long as bank profits are high, the system is sound and it doesn't matter how those profits were made. This is the culture of both the OCC and the Fed, and it is what needs to be blown up. NOW.


Washington: Steve, your comment about only the FED can do that and quickly ignores the whole point of your column today. You claim the OCC is captive to the banks it regulates. But the Fed IS the banks it regulates, and the banks it regulates pick the Boards of each Federal Reserve Bank. I don't see you bringing up the inherent conflict, say, of a Goldman Sachs director or former CEO buying shares in a bank he regulates. Also, if the Fed moves quickly, and is right for the job, all these large banks are holding companies. Where has the Fed been with any actions? They're no better than OCC, in reality, no?

Steven Pearlstein: Nobody ever said the FEd was a better day to day regulator. They are just as bad, and I've written that. But a systemic risk regulator is something different, as I suspect you know all too well.


Washington, D.C.: Steve, did the OCC's position change under Dugan, or has it basically taken the same stance under both Clinton and Bush appointees. I recall that the Comptroller appointed by Clinton, John Hawke, had similar views as Mr. Dugan.

Steven Pearlstein: I would agree that Hawke had some of the same blindspots and was not successful in changing the culture at the OCC. He also placed much, much, much too much faith in bank risk management systems. These guys just can't seem to be able to blurt out the words: Stop making these loans now or we'll slap you with a cease and desist order.


Towson, Md.: A comment ... as a retired former Federal Reserve employee, I sometimes heard money supply economists express concern that if banks disliked the way they were being regulated, the banks would cease providing the data (often daily data by large banks) needed to manage the money supply. This was data provided on a voluntary basis. The regulatory function seemed less important than managing the money supply.

Steven Pearlstein: There is no doubt that bank regulation, in the view of Fed governors, takes a back seat to monetary policy. They see the banks as instruments of monetary policy more than as holders of the savings of taxpaying Americans who deserve a degree of protection from profit-maximizing bankers who operate with government charters and government insurance. This is why they shouldn't be day to day safety and soundness regulators any more.


Washington, D.C.: Steve, regarding today's column on bank regulation, I think that underestimate the difficulty of changing supervisory standards. As a former regulator I can attest to the fact that almost all significant regulatory policies are developed on an inter-agency basis, and the OCC is not an outlier. The fact that it took over a year to issue formal guidance on commercial real estate lending has more to do with the nature of the inter-agency process than recalcitrance on the part of the OCC to move forward.

Steven Pearlstein: It doesn't have to take a year if the regulators are willing to take the political heat and just do what they know they should. They are so afraid of Congress and the White House that they fail to do their jobs, which is to exercise their best independent judgment about what is a safe and sound banking practice. Policy needs to drive process, not the other way around.


Evanston, Ill.: At what point should the Feds apply some anti-trust laws and break up whomever is too big to fail?

Steven Pearlstein: The Fed doesn't enforce antitrust laws and, as far as anyone can tell, doesn't even agree with them. It never met a bank merger it didn't like.


Re: Washington DC: Steve,

While it's correct that there's little recourse against BOA, there is a consumer option if you live in the Northeast. Move your accounts from BOA to a Canadian-based bank (TD Bank is the one I'm thinking of, but I suspect there are others.) Because they're Canadians, they're way nicer and I feel like my money is more secure with them.

Steven Pearlstein: I'm not sure they're Canadian at the level that matters to our correspondent, but its a nice thought.


Baltimore, Md.: Re Canadian banks solvency: When I first heard that the Canadian banks were only marginally implicated in what happened with securitized mortgages, etc. I did a little research. Not only are they conservatively run, but Canada seems to have many fewer banking institutions, per capita, than we have. Makes it easier for the government to keep an eye on them, I guess.

Steven Pearlstein: Maybe, maybe not. Suspect that's not a big factor.


Steven Pearlstein: That's all the time we have for today, folks. Good discussion. I'll be away next week, so let's pick up the week of June 10.


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